Busting myths: Why it makes little sense to worry over FII selling

MUMBAI: India's reliance on foreign investors in the stock market has not lessened despite the sizeable growth in the domestic mutual fund industry in the past decade. Since 1993, when capital controls were loosened, FIIs have bought $130 billion of Indian stocks and were largely responsible for the indices soaring to record highs.

In September and October this year, FIIs purchased more than 31,000 crore of Indian stocks, reversing three months of sales triggered by Ben Bernanke's hints about a cutback in monthly bond purchases. The purchases slowed somewhat in November causing momentary panic as investors assumed that fickle foreigners were getting to flee the country for greener pastures.

Since they began investing in India in the early 1990s, FIIs have been dogged by this perception that one day they will get up and go and leave the country in search of newer emerging markets and back-from-the-dead developed markets. The perception turns into panic especially in times of crisis as FIIs are then presumed to act wihout any concern for the value of their holdings, the attractiveness of India as an investment destination. You could almost hear the hoarse whispers, "It is hot money, they will sell and go," as if the FIIs were just a flock of geese to bolt into the sky at the sound of the first gun shot.

The fact that FIIs have made large purchases amidst deepening economic gloom and falling corporate earnings have obviously not diluted the strength of the perception.

In the past two years alone, offshore funds have bought more than 1,50,000 crore into Indian stocks. The money has kept markets buoyant despite continuous selling by mutual funds and a growing perception that India is not a great place to invest.

The recent alarm has been sparked off by negligible flows in November. FIIs have bought just over 5,000 crore compared with nearly 15,000 crore in the preceding two months. As whispers of tapering grew and reached a crescendo, it was assumed that FIIs would just withdraw. A quick check of facts would be enough to disabuse anybody of this perception.

Morgan Stanley's latest report on emerging market fund flows shows that outflows from emerging markets have increased. Dedicated EM funds reported outflows of $4.64 billion for the week ended November 13 but some of the biggest outflows were in Brazil, Mexico and Turkey. In dollar terms, Brazil lost $0.86 billion, Korea lost $0.83 billion and Russia $0.46 billion. FIIs have just sold one day in November in India and their total net purchase is about 6,000 crore.

Not many people are probably aware of this but FIIs have been net sellers of Indian equities in just two out of the past 11 years. That was 2008 when financial markets reeled under the combined onslaught of bank collapses and a credit market freeze, and 2011 just when Indian growth was slipping and inflation was becoming a menace. They were net sellers of 55,000 crore in 2008 and 4,000 crore three years later.

The best years for FII investment in India were also the years after the Great Recession, 2010 and 2012, not the best years of economic growth. Foreign funds bought 130,000 crore of equities in each year, a record since they began investing in 1993. So much for the theory that FIIs flee at the first sign of trouble. FII ownership of Indian stocks was 12% in 2001. It is now 21%. If any, FIIs have been continuous, regular investors.

India is not the only country to benefit from this FII largesse. China and Brazil have received more money from FIIs since 2006 than India and Russia, the other BRIC partner. This year, the Morgan Stanley report shows that India has not seen the kind of outflows as seen in China and Brazil.

With concerns over emerging market valuations rising, funds have been choosy, preferring newer sectors such as healthcare than financials or consumer companies. This year, rattled investors responded to Brazil's currency crisis by dumping Brazilian shares. FII flows as a percentage of total market for Brazil is just 0.4% compared with India's 1.63% and Japan's 3.72%. FIIs have sold heavily in Indonesia this year while South Korea's flows to market cap is just 0.51%.

FIIs are never continuously positive or negative on India. Like any investor, they buy when they see value and sell when they are at the top. This explains the frequent gyrations and the bouts of selling and buying. Even at times of heavy pressure, FIIs have never been continuous sellers and vice versa. Indian investors need to understand this.